Are your contracts disaster-proof?

Howes Percival LLP

20th February 2020

Coronavirus, flooding, bush-fires, extreme weather, civil disturbance – although rare and unpredictable, all are happening with increasing frequency and can severely disrupt supply chains and prevent performance of business contracts. Failure to perform your contracts risks claims for breach of contract and claims for damages from the party not in breach.

How can your commercial contracts enable a means of escape for performance in the event of such unforeseen disasters?

FORCE MAJEURE CLAUSES

A force majeure clause in a contract can provide a mechanism for either party to delay or abort performance or avoid liability for breach of contract on the occurrence of circumstances beyond that party’s control.

It is important to remember, when seeking to rely on such a clause, that it will only be effective if the force majeure event is the sole cause for that party’s inability to perform the contract, the said event was outside the reasonable control of that party and the event was covered by the scope of the force majeure clause. The party seeking to rely on the clause should also consider alternative ways to perform the contract to mitigate its losses.

An effective force majeure clause should include a clear definition of which circumstances will constitute a force majeure event as well as any circumstances that will not constitute a force majeure event. Consider industry-specific situations and the nature of the obligations under contract.

The clause should also provide a time period for suspension of performance after which there is the ability to terminate the contract and a promise that part performance prior to the event will be suitably paid for.

The clause must be reasonable otherwise it may be declared unenforceable by a court. This is particularly the case in consumer contracts which are subject to statutory tests for reasonableness, fairness and transparency.

FRUSTRATION

No force majeure clause in your contract? The common law doctrine of frustration may be available if the contract is impossible to perform due to a serious event which is unexpected and beyond the control of the parties. It may also assist where the event makes the contract commercially impossible to perform or the event turns the contractual obligations into something completely different from the original intentions.

Frustration is interpreted narrowly by the courts and has been found to be unavailable in many circumstances including an event contemplated in a force majeure clause, foreseeable events, lack of performance relating to the conduct of one of the parties or where performance is no longer economically viable.

A frustrated contract will be discharged automatically and terminated. However, it will not restore each party to its pre-contractual position and some pre-termination obligations will survive, such as payment for benefits received before the frustrating event.

INSURANCE

Consider your business interruption insurance and the scope of its cover.

If you have any queries relating to your commercial contracts please do not hesitate to contact one of our team.

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